Insurance implications of a flawed property valuation

The property valuation system in Cape Town was recently under question when investigations revealed the value of some properties were increased, which led to increased tariffs and taxes for homeowners.

A flawed property valuation could have a severe financial impact for the homeowner and lead to big financial loss in the event of an insurance claim.

This is according to Dawie Loots, Chief Executive Officer (CEO) of MUA Insurance Acceptances, who states that is it the responsibility of the property owner to ensure that the insured value of their property is accurately reflected on their insurance policy. "When it comes to insurance it is vital that homeowners ensure that their property is properly evaluated because the home must be insured for the replacement value and not necessarily for market value."

He explains that the market value of a home is the price that the home can be sold for. "The replacement value is the determined amount it will cost to restore the house back to its original condition should total destruction occur."

The replacement value of a house can possibly be much higher than the market value, especially if the house has very specific features or exclusive finishes (such as expensive tiles, or imported windows) that will be expensive to replace, he says. "This will essentially mean that the homeowner runs the risk of underinsurance and should a loss occur, their insurer might not pay out the full claim."

If a homeowner uses their valuation amount as specified by their municipality as their insured amount, they run an increased risk of being underinsured. "It is important to bear in mind that the municipal valuation is normally done from a market value perspective."

In addition, Loots states that when the homeowner makes any renovations to the home - it is vital to conduct a property valuation to ensure that the insurance policy can be updated according to the new value of the home following the alterations.

"Some insurers do offer a professional valuation service to their clients to ensure that the insured value of the property is sufficient. It is however the policyholder?s responsibility to ensure that the accurate value is reflected in their home insurance policy. Insurance brokers also play a role here to educate their clients about this and advise them correctly," he says.

"It is also advisable that homeowners conduct proper property valuations at least once a year when the policy is up for renewal to ensure that the insured value of the property is still relevant. Homeowners should consult with their insurance broker or company to ensure that they are sufficiently insured for the correct replacement value in order to avoid underinsurance," concludes Loots.

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These days most buyers are using online property portals like Private Property when house hunting due to the convenience, up to date information and variety on offer. “The property portals have revolutionised the way buyers shop, but they do need to be cautious – viewing photos online is no replacement for viewing the property in person,” says Bruce Swain, CEO of Leapfrog Property Group.

Owning a home is a milestone that most South Africans aspire to. Becoming a homeowner is a step towards growing personal wealth and owning an asset that appreciates in value over time, provided of course that the correct principles are applied during the buying stage of the process, says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.

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Possibly one of the biggest sources of contention between landlords and tenants surrounds the rental deposit. “Most tenants rely on getting their rental deposits back when moving, so that they can use it to pay a deposit on their new home. Having it withheld or even having large amounts deducted can lead to a lot of distress,” explains Bruce Swain, CEO of Leapfrog Property Group.